With Industry at a Crossroads, Time to Realize Then Prioritize
The financial services industry and particularly credit unions are at a crossroads right now. Many toss the term crossroads around every time a tweak occurs, but current circumstances are exactly what the word was created for. Some things will need to change or credit unions will cease to exist.
First and foremost, credit unions' overreliance on fee income must come to an end. Not only will fees charged to members likely be regulated away, it's also not in keeping with the credit union philosophy. Fees such as overdrafts punish members for their missteps; instead, credit unions can grant a small line of credit attached to the checking account that charges a modest interest rate. Credit unions' fee income increased from $6.9 billion in 2008 to $7.1 billion in 2009, or 3%, according to consultant Tony Ward-Smith.
Relationship pricing can help credit unions replace that fee income and create deeper relationships with their members at the same time. Charge X dollars to open a checking account and hand that member a debit card (interchange income, which should stay), but if the member also takes two other products, like a credit card and a CD, then cut out the checking account fee. This way the member feels like they're getting a special deal and the credit union automatically has a stronger relationship with the member. The members over the age of 15 who just want savings accounts are only going to end up costing you money anyway.
And as I wrote in a recent blog post (cutimes.com/blog) that stirred a lot of debate, drop the word "credit union" from your marketing. It's a massive hurdle for credit unions to have to explain what a credit union is before they explain what they do. Credit unions provide financial services, so sell that.
Drop "join" from advertising. It serves absolutely zero purpose to the credit union or the member. "Share draft" and "share certificate" are archaic and have to go. If you have to explain 20,000 times that a share draft is the same as a checking account, then just call it a checking account and save your energy for more important things, like cross selling an auto refis.
I'll probably be flogged for this one: The tax exemption is more of an inhibitor than helper. I'm not saying credit unions should ask to be taxed or should convert to mutual savings banks, but it should not stymie progress either. Credit unions should never back away from what they need to succeed, such as risk-based capital, alternative capital, member business lending, open fields of membership, just because of the threat of taxation. Whatever credit unions got would absolutely have to have more value than the loss, if there is one. According to FDIC data obtained by NAFCU, 3,605 banks did not pay any federal or state taxes in 2009. This included not only Citibank and Bank of New York Mellon but all the way down to the $4 billion Nevada State Bank, They all received massive refunds.
It would be a mistake for Congress to decide to start taxing credit unions because they are not-for-profit cooperatives that do a world of good for their members. Credit unions could still behave like credit unions. But, if in the end, it did mean credit unions would have expanded capital resources and service authorities, they would be better positioned to succeed after taxation rather than being stuck in a 1934 capital structure in the 2010 financial services market place.
Lobbying for these changes, whether your credit union plans to use them or not right away, is crucial to the future of the credit union movement. But if you think I'm full of garbage, then you need to make your voice heard, too. Participation in the legislative and rulemaking processes is critical to influencing any of it.
Finally, credit unions need to consider paying board members. The market place is constantly moving all over the place and financial institutions are growing exponentially in complexity. Attracting the appropriate level of expertise to a credit union board is crucial. Not all credit unions would have to do it and not all would have to do it the same way. However, to expand the pool of potential qualified board applicants, money talks.
What is important is that credit unions remain committed to-not just pay lip service to-their not-for-profit, cooperative status. Competition and consolidations has created a level of distrust among credit unions to where they do not share as much as they used to. This needs to stop. A board or membership is going to vote to merge or not with another credit union for one reason or another, but it's not going to be because the big guys made them do it. Case in point: the attempted merger by Wings Financial of Continental.
Operating expenses must be brought under control. Last year, according to Ward-Smith, credit unions increased operating expenses from $26.9 billion in 2008 to $27.4 billion in 2009, or a 2.1% increase. I didn't realize credit unions were having such a good year they could afford this. Credit unions need to be willing to let go of under-performing assets such as branches or employees whose positions are no longer necessary.
Loans per member have remained stagnant since 2003, nudging up from 0.50 to 0.51. In the meantime, deposits per member have increased from 1.73 to 1.85 last year. Yet, operating expenses have jumped from $229 to $301. How is this paid for? Oh yes, fee income per member is up from $53 in 2003 to $78 in 2009.
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